Stubborn inflation, interest rates at multi-year highs, bank failures, trillions of dollars in consumer and government debt, war in Europe, yet the markets are up double digits year-to-date. Are these double digit returns so far this year the beginning of a new uptrend or are they a head fake awaiting an overdue recession and return to the double-digit market losses experienced in 2022?
Nobody knows for sure, but if you’re younger, working and actively participating in your employer’s retirement plan and/or contributing to your IRA, a return of stock market volatility will provide an opportunity to buy more with fewer dollars.
However, as we age, many start to feel differently about money. We become more fearful and emotional and think in much shorter terms, even though life expectancy is ever increasing. We become ultra-protective with our money and seek to eliminate all risk of loss. When you consider that most will spend 25-30 years in retirement, this mindset may cause an equally poor outcome-running out of money. Whatever the reason for the fear and emotion, it’s real and we
must understand and deal with it, or risk letting it influence poor decisions.
So, what should the average investor do if/when stock market volatility returns? If you’re 20-50 years old, go back and reread the beginning of this article. If you’re 50+, concerned or scared and not sure what to do or who to talk to, let me suggest an alternate path.
I recently read a great analogy that compares stock market volatility to taking a voyage across the ocean. Inevitably you will encounter a storm during your voyage. You have two choices; batten down the hatches and go directly through the storm and hope for the best. You will likely encounter damage that will set you back in your journey. How long of a setback depends on the severity of the storm.
Your second choice is to go around the storm. Temporarily altering your course will obviously extend your journey, and you may miss some good days, but the damage you sustain will likely be minimal. When the storm passes, you’ll get back on course and continue your journey.
Now some may ask how do you know how bad the storm will be and if you should go through or around it? Truth is, you don’t know, but weather patterns, radar, and past storms may shed some light on what to expect.
The same is true for the stock market. There is a century of market history showing patterns, trends, challenges, and outcomes. As in life, if we don’t learn from history, we’re doomed to repeat it. Very few bear markets (a market that is down 20% or more from its most recent peak) are unique. They all share many characteristics and causes. It’s how we react to them that makes the biggest difference.
So how does an investor use stock market history to make decisions? Let’s start with a few basic foundational beliefs:
1. No strategy or process is guaranteed
2. There is no way to control stock market volatility
3. Emotions must be eliminated from the decision-making process
As we get older, emotions play a larger role in many of the decisions we make, especially about relationships and money. Most individual investors aren’t capable of separating emotions and information on their own, they need a buffer. They need an unemotional third party with the knowledge, experience, and resources to replace emotion with data and information.
As we stated before, an investor can’t control stock market volatility. However, an investor can control their exposure to that volatility. If we see the storm coming, we can go through it (buy and h
old) or go around it (defensive). I’m not talking about market timing. I am talking about paying attention to what the market and the economy are telling us. I’m talking about learning from past economic and market downturns to make data driven decisions.
What if an investor combined the principles of buy and hold with defensive tactics to build and manage an investment portfolio that changes stock market exposure based on measurable data? I call this Tactiful™ investing. Tactiful™ investing focuses on analyzing data and utilizing an unemotional set of rules to determine when to increase, decrease or even eliminate exposure to stock market volatility.
The purpose of this strategy is not to avoid all drawdowns in the value of an investment portfolio. Remember
our first foundational belief is that no strategy or process is guaranteed. What we are trying to avoid are the massive drawdowns in value that cause poor, emotional decisions at the wrong time. By taking emotion out of the e
quation and replacing it with data driven rules, we hope to build a portfolio that captures a majority of the upside of the stock market while limiting the downside.
It's important to remember that even if we go around a storm, we will run into some clouds, wind, and rain. The same can be said of employing a Tactiful™ or defensive approach to the stock allocation of your investments… we will experience some volatility and drawdown. But hopefully, far less than if we went directly through the storm.
If you’d like to talk about Tactiful™ investing, or have questions or concerns, please set up a call. There is never a charge or any obligation for an introductory conversation.
For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisors LLC nor any of its representatives may give legal or tax advice. All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful.
Securities and advisory services offered through Cetera Advisors LLC, member FINRA/SIPC, a broker-dealer and Registered Investment Advisor. Cetera is under separate ownership than any other entity.
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